An overview of the challenges in achieving agile contract governance.
If you think compliance is expensive, try non-compliance.”
— Former U.S. Deputy Attorney General Paul McNulty
Contracts are what drive, and define, business. In fact, they define a vast number of non-business relationships as well. How those contracts are managed and how the data in them is governed is vital. To dig into the challenges and solutions on that topic, we’re present this two-part blog on agile contract governance. Part one kicks off by outlining the challenges of organizational stakeholders. Part two explores how these challenges can be more effectively addressed.
Today, companies are grappling with the ever-increasing amount of unstructured data that has built up from company acquisition, document management solutions, digital archiving and authoring using desktop applications that are now available on all types of devices. In fact, according to a report from the Information Governance Initiative*, the amount of digital information in the world will double every two years.
Critically, while information volume is growing across the board, the vast majority of the growth is in unstructured information which is growing faster than most organizations’ abilities to handle it. That makes it hard for organizations to generate any real value from the data, much less control the complexity and risk that it represents.
One of the biggest challenges is to effectively and efficiently expose the value of this information to the business. How do you separate the relevant from the irrelevant? Many companies look to information governance for information management, compliance, retention, disaster recovery and business continuity.
Research and advisory firm Gartner defines information governance as:
The specification of decision rights and an accountability framework to ensure appropriate behavior in the valuation, creation, storage, use, archiving and deletion of information. It includes the processes, roles and policies, standards and metrics that ensure the effective and efficient use of information in enabling an organization to achieve its goals.”**
Businesses, therefore, need to establish which data is of high value and implement a plan to manage and leverage the information extracted. How does a business determine which data is more valuable than others?
A key data set from which to acknowledge, gain visibility and value is contracts.
Why? Because the data contained in contracts affects every area of the business: General Counsel/Legal, Procurement, Finance, Sales, Customer Service and IT. But, it affects them differently, so let’s take a look at the specifics:
Contract challenges faced by the General Counsel
According to the 2018 Litigation Trends Annual Survey from Norton Rose Fulbright, 87% of businesses surveyed expect the number of litigations and legal disputes to remain the same or increase. Across industries, the number one or two dispute is “contracts.” Contract disputes arise in a vast number of contexts, and often litigation is related to respecting the various contract parties’ expectations, rights and obligations based on the quality of goods ordered and delivery criteria, performance under license agreements, the interpretation of agreements regarding provision of complex services, performance agreements and more.
Ⓒ 2018 Norton Rose Fulbright US LLP
In a survey conducted by the International Association for Contract & Commercial Management (IACCM) of 750 organizations, the number one focus area for improvement is contract management tools and systems. In other words, technology. This is in an effort to expand automation, leverage dynamic playbooks and clause libraries, or even delve into machine-based negotiating. Companies are also looking to improve contract standards and structure, skills development, risk management and a number of other areas. As IACCM puts it, “…technology is an enabler of these improvements,”*** or in other words, agile contract governance.
Contract challenges faced by Purchasing / Sales / Customer Service
Bluntly stated in a McKinsey report, the majority of contracts lack basic elements that could enable better vendor performance and cost savings, and the majority of organizations invest relatively limited resources in contract development and vendor management.**** Ouch.
Causes include contract volume, lack of procurement resources or ownership, organizations not being aware of competitive terms and/or contract structure, and a narrow focus of terms and conditions that is not forward-thinking enough.
As more organizations embrace the idea of digital transformation, a lot of resources have to be put behind the need for systems integration — customer facing CRM, ERP, procurement, finance, sales and of course contract lifecycle management. Simultaneously, all this technology is disrupting trading relationships in a globally networked world. Contracts are increasingly becoming a primary management tool for integrating business operations, ensuring compliance and instilling integrity.
In light of this, contract management has evolved into a sophisticated approach to integrate disciplines across enterprises, along with the data and other assets they represent.
While contract creation, approval workflow, reporting, analysis and alerting collectively provide value on all new contracts, there is a major piece missing: all the current, active contractual obligations and the onboarding of active 3rd-party contracts that reside within the business. If we again consider the litigation aspects, this is a significant potential blind spot for the organization.
How have these challenges typically been addressed?
Organizations have realized that the first key phase is to discover and get visibility of their contractual assets. From there, make informed decisions and leverage the contract corpus to determine revenue opportunities as well as cost and expense mitigation. This project has typically involved taking the contracts to an external third party — for example, a legal process outsourcing (LPO) firm, which will manually extract the designated fields and provide them in a spreadsheet format or populate the target application as part of the project. This is expensive and, if the requirements change or additional metadata is required, this process needs to be repeated, causing further delays and expense.
Existing contract governance solutions and drawbacks
To discover and gain visibility of their contractual assets, organizations have typically deployed a global search platform and/or an eDiscovery solution as part of their information governance strategy. These search solutions provide the user with a list of potentially millions of hits based on a simple keyword search, which the user then needs to reduce by opening many documents to decide which ones are truly relevant. Similarly, eDiscovery also leverages keyword searching, and in recent years predictive coding, which essentially is a process for a subject matter expert (SME) to review and mark a sample set of documents as being relevant.
This still requires someone to manually review each of the resultant documents. Bear in mind, these applications are classifying not just contractual documents, but all unstructured documents, emails, content management applications and structured documents, which means the search results returned could be lengthy running into the thousands or even millions.
There are solutions that combine information derived from rule-based extraction, where people are employed to manually review the documents and extract the designated information for future uploading into another application. Any changes to the business question requires the manual review to be repeated, rules to be modified or new ones created by the vendor, which does not lend itself to agile contract governance.
In Part Two of this blog series, we’ll explore how the challenges of agile contract governance can be more effectively addressed, especially with the help of technology.
*©2015 Information Governance Initiative LLC
***IACCM.com, February 2019
****McKinsey & Co., Contracting for performance: Unlocking additional value, May 2018